Research

Monetary Policy Wedges and the Long-term Liabilities of Households and Firms, with Jules Van Binsbergen.   

Abstract

We examine the impact of monetary policy transmission on households’ and firms’ long-duration liabilities using high-frequency variation in 10-year swap rates around FOMC announcements. We find that mortgage rates respond about three weeks after monetary policy announcements, with a larger response to interest rate hikes compared to cuts in post-2010 data. The strong response of mortgage rates to 10- year swap rates leaves little explanatory power for mortgage concentration or bank market power. Corporate yields respond symmetrically to positive and negative shocks, with a higher sensitivity for firms with lower credit ratings. We show that expected future short rates and interbank market frictions play a significant role in explaining both mortgage rates and corporate bond yields. While the term premium correlates positively with mortgage rates, it has little comovement with corporate bond yields.

Foreign Influence in U.S. politics, with Max Miller and S.Lakshmi Naaraayanan. Online Appendix available here.  An easy-to-read summary   

Abstract

We document that foreign lobbying shapes US government spending and public policy. We introduce a comprehensive dataset of 180,000 date-stamped, in-person meetings between foreign agents and individual US legislators, spanning 2000 to 2018 and covering 146 countries and 1,200 legislators. We find that (1) meetings are positively related to legislator lawmaking effectiveness and membership to foreign affairs committee and (2) foreign agents maintain connections with legislators even after they depart from important committees. Around these meetings, (3) foreign countries benefit from increased financial aid and advantageous product tariffs and (4) foreign firms whose governments lobby more often benefit from larger subsidies and US government contracts. Finally, we study benefits and costs accruing to legislators and show (5) monetary and electoral benefits, but no evidence that US legislators are punished by their constituents because they meet with representatives of foreign countries.

Cyclical dispersion in expected defaults, with Joao Gomes and Jessica Wachter,  Review of Financial Studies, 32 (4), pp. 1275-1308, April 2019. Online Appendix available here. Working paper available here.

Abstract

A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes. 

Risk-free Interest Rates, with Jules Van Binsbergen and William Diamond, Journal of Financial Economics, 142 (3), pp. 1-29, January 2022 (lead article). Working paper available here.

Daily Data

Abstract

We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.

Real-time Price Discovery via Verbal Communication: Method and Application to Fedspeak, with Roberto Gomez Cram. Journal of Financial Economics, 143 (3), pp. 993-1025, March 2022. Working paper available here.

Abstract

We study the price discovery process during FOMC days. For several asset classes we find that price movements around the post-meeting statement release are strong predictors of price movements around the subsequent press conference. The correlation is as high as 58% for medium-term Eurodollar futures and 44% for the S&P 500 index. We then use press-conference videos, timestamp the words pronounced, and align them with high-frequency financial data. Minutes in which the Chairman discusses changes in the newly-issued policy statement lie behind the positive correlation. We discuss several potential explanations and consider the implications of our findings for asset pricing and monetary economics.

Follow the money, Online Appendix available here. Review of Economic Studies, 91(2), pp. 1122-1161, March 2024 (Featured Article).Working paper available here.

Abstract

I study, both empirically and theoretically, the economic and financial consequences of corporate lobbying. Firms lobby politicians to increase their share of government contracts, but political competition creates firm-level risk, inflating their cost of capital and reducing their incentive to invest in research and development (R&D). I document an annual 6%–8% return premium for stocks of high-lobbying firms, which compensates investors for political risk. An estimated model in which firms can lobby and innovate and investors are risk averse replicates key features of corporate lobbying in the US, including the well-established paradox that lobbying contributions are small relative to the policies at stake. The model predicts that if investors ceased seeking compensation for political risk, R&D investment would increase by 6% and the innovation rate by 0.4 percentage points. The risk-premium costs of lobbying are quantitatively and economically important even if the resources “wasted” on lobbying are objectively small.

Foreseen Risks, with Joao Gomes and Jessica Wachter. Online Appendix available here.  Journal of Economic Theory, 212, September 2023. Working paper available here.

An easy-to-read summary

Abstract

Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value varies over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

The present value of future market power, with Thummim Cho, Lukas Kremens, Howard Kung. Forthcoming. Review of Financial Studies.

Abstract

We introduce a present-value identity relating a firm's market value to expected future markups, output growth, discount rates, and investments. Distinguishing current from expected markups reveals five empirical facts: (i) Expected markups account for half the rise in U.S. firm values since 1980. (ii) The rise in aggregate expected markups reflects market-share reallocation towards high-expected-markup firms and within-firm increases. (iii) Expected markups are linked to intangible investments. (iv) They relate negatively to discount rates over time but (v) positively to abnormal returns across firms.  Finally, variation in long-term expected markups is primarily associated with asset prices rather than current markups. 

The impact of carcinogenic risk exposure on housing values: Estimates from chemical reclassifications, with Jules Van Binsbergen, Joao Cocco and S.Lakshmi Naaraayanan.    Conditionally accepted. Review of Financial Studies.

Abstract

We quantify the impact of perceived cancer risk on housing values using widely-advertised national reclassifications of chemical carcinogenicity in the United States. Combining these information events with an empirical design that compares changes in house values closer to affected toxic plants against those farther away isolates the effect of cancer risk news from other local factors. Focusing on plants previously emitting reclassified carcinogenic chemicals, we estimate a 1-2% decline in housing values within a 3-mile radius compared to those located farther away. The effects are stronger in areas with higher media presence underscoring the role of salience as a mechanism.